Cape Alternative - Update

In a previous post, CAPE - An Alternative Calculation, I discussed some problems with CAPE (cyclically adjusted price to earnings ratio) and offered a solution which addresses one of those problems which is the growth problem. Today I'll briefly illustrate the growth problem and then look at my solution from an historical perspective.

More on the Constant Growth Assumption

So earlier, in Uncertainty of the Constant Growth Assumption, I discussed how even if we know with certainty (hah!) what rate of growth cash flows (in our example, dividends) will grow at, we may still end up getting the value incorrect. This is due to the fact that actual cash flows are lumpy and don't grow at a nice constant rate but vary quite a bit. The result is that the present value of the asset can be a good deal more or less than where we estimated it to be.

Today I want to look at this from a different perspective. I also wanted to change some of the inputs of the model I used (which, you could do on your own if you downloaded or made a copy of the original spreadsheet.) Instead of focusing on how the actual present value of the cash flows differs from what the model predicts, I want to look at it from the perspective of what returns you'll actually get.